Multinational companies are dumping their Venezuela operations in fire-sale deals

Commuters pass by the front of a Bridgestone Firestone
tires store in Caracas.Thomson
Reuters

CARACAS (Reuters) — Multinational companies are selling their
Venezuelan operations at hefty discounts - or even giving them
away - as they to seek to escape the OPEC nation's soaring
inflation and chronic supply shortages.

Six firms, including General Mills and oil producer Harvest
Natural Resources, have sold operations for as little as half
their assessed value on the companies' books, according to
securities filings and interviews with a dozen people
knowledgeable about the deals.

One company, U.S. autoparts-maker Dana, last year sold its
debt-laden Venezuela operations to a local buyer for no cash
compensation. Two multinational corporations - Clorox and
Kimberly-Clark - chose instead to abandon their operations here.

Sell-offs by foreign companies could further isolate Venezuela's
economy, which is already reeling from low oil prices and an
unraveling socialist system. The fire-sale trend will likely
accelerate as the crisis continues to cripple the local
operations of more multinational firms, according to two
private-sector sources familiar with similar deals in the works.

Firms acquiring such distressed operations, however, could reap
huge gains if the country's economy improves.

People
line up to buy food and other staple goods inside a supermarket
in Caracas, Venezuela, June 30, 2016.REUTERS/Mariana Bazo

Corimon — a Caracas firm best known for production of paint — in
May purchased the local operations of Bridgestone Corp, the
world's largest tire-maker. Corimon will continue to produce
tires under the Firestone brand.

Carlos Gill, president of Corimon's holding company, declined to
disclose the sale terms but called the timing of the purchase "an
opportune moment" for his company.

Bridgestone declined to comment.

The sold-off operations, in some cases, were all but defunct
before the deals because of chronic shortages of raw materials
ranging from sugar to steel bars, as well as triple-digit
inflation and difficulty exchanging a crashing local currency for
dollars.

"A company that isn't operating is a corpse, and the vultures
start to circle it," said Juan Pablo Olalquiaga, president of
Venezuelan industry association Conindustria.

Sold 'for no consideration'

President Nicolas Maduro has blamed the country's woes on an
"economic war" launched by U.S. business elites and encouraged by
Washington politicians. Maduro has said companies are
intentionally slowing production or hoarding goods to destabilize
his government.

The Venezuelan government's Information Ministry did not respond
to requests for comment.

A
man looks for groceries and goods at a supermarket in Caracas,
Venezuela, November 11, 2016.Thomson
Reuters

For years, Venezuela operations generated major revenue for
Fortune 500 companies because high oil prices allowed the
government to sell subsidized dollars through its exchange
control system, boosting companies' local buying power.

But the 2014 oil price crash left Venezuela short of dollars
because the country depends on oil for almost all its foreign
exchange.

More companies are deciding the country's challenges now outweigh
any benefits. General Mills - owner of locally popular Diablitos
Underwood deviled ham - reported in a filing earlier this year
that it had taken a $38 million pre-tax loss on the sale of its
local unit to an undisclosed third party.

Negotiations dragged on for nine months as the economy tanked,
forcing General Mills to steadily lower the price, according to
two sources with direct knowledge of the talks. General Mills did
not disclose the sale price and declined to comment to Reuters.

Insurer Liberty Mutual said in statement last year that it was
selling its local affiliate, Seguros Caracas, to a local
entrepreneur, Humberto Gil. One source familiar with the deal
described the arrangement as a "gift."

Gil did not respond to requests for comment on the sale, which
still needs approval from Venezuela's insurance regulator.
Liberty Mutual did not respond to requests for comment.

In 2014, Danish conglomerate The East Asiatic Company (EAC) sold
its Venezuelan food business, Plumrose, to Liechtenstein-based
Valartis Opportunities Fund. Neither company responded to
requests for comment.

Opposition
supporters take part in a rally demanding a referendum to remove
Venezuela's President Nicolas Maduro in San Cristobal, Venezuela,
November 3, 2016.Thomson
Reuters

U.S. auto parts firm Dana said in a 2015 filing that it had sold
its local affiliate "for no consideration" to a Venezuelan firm
called Manufacturing and Logistics Solutions.

While auto sales soared during the oil-boom era of late socialist
leader Hugo Chavez, they dropped 80 percent in 2014 as
Venezuela's economy ran into hard times.

Dana sold the company for no payment, though it did secure an
agreement that Dana would continue to supply raw materials and
that the buyer would assume debts.

"After 49 years here, Dana couldn't exactly walk away from the
company," said Jose Hernandez, who was on the board of directors
of Dana's local unit and stayed on after the sale.

Writing off Venezuela

Some companies did decide to walk away, an unusual move.

A
view of a gas station of Venezuelan state oil company PDVSA in
Caracas, Venezuela, June 30, 2016.REUTERS/Carlos Garcia Rawlins

Despite mounting losses, companies rarely shut down businesses in
Venezuela because they can face government accusations of
economic sabotage or have managers imprisoned.

But Cleaning supplies company Clorox and personal hygiene
products manufacturer Kimberly-Clark shuttered their operations
as their facilities nearly ground to a halt for lack of raw
materials.

Clorox, which left in 2014, said in a statement at the time that
its Venezuela business was "no longer viable." Kimberly-Clark
suspended operations this year, citing inability to obtain raw
materials or hard currency.

Both were taken over by the Venezuelan government and have
resumed operations under state control. Jorge Arreaza, Vice
President at the time, accused Clorox of setting an "evil
example" by leaving. Labor Minister Oswaldo Vera said Kimberly
Clark threw "thousands of workers onto the street."

Both companies declined further comment on their Venezuela exit.

Other companies are writing down the value of their Venezuela
operations through an accounting mechanism known a
deconsolidation, which could signal that more sell-offs are in
the offing.

The maneuver, already used by more than a dozen multinationals,
involves a one-time write-off of the entire value of a company's
subsidiaries. It is meant to avoid a constant trickle of
balance-sheet losses caused by repeatedly slashing the worth of
assets that are valued in Venezuelan currency.

A
cashier counts Venezuelan bolivar notes at a supermarket checkout
line in Caracas, September 9, 2014.REUTERS/Carlos Garcia

It also creates incentives for Venezuelan buyers to put in bids
for local factories and other assets.

Bridgestone, before selling its Venezuela operations to Corimon
in May, deconsolidated its Venezuela operations in 2015 and
reported an associated loss of $350 million.

Ford Motor Co and Oreo-cookie manufacturer Mondelez International
Inc are among those who have written off their assets because of
severe operational difficulties.

Ford told Reuters it remains "hopeful that the government will
resolve local issues, and we can then begin to support the
Venezuelan people with additional production." Mondelez said it
would continue to manufacture products "to the extent that we can
locally fund operations and access necessary materials and
labor."

Government intervention

Last month's sale of the Venezuela operations of Harvest Natural
Resources offered a rare opportunity for local investors to gain
a foothold in the Venezuela oil industry, which is dominated by
state-run firm PDVSA and large foreign energy companies.

PDVSA has for years been delaying payment to business partners,
including Houston-based Harvest. Struggling to make up those
losses, Harvest in 2013 negotiated a $400 million asset sale with
Petroandina Resources Corp, a unit of Argentina's Pluspetrol
Resources Corp, according to a Harvest filing from March.

An
oil tank is seen at PDVSA's Jose Antonio Anzoategui industrial
complex in the state of Anzoategui, Venezuela, April 15,
2015.REUTERS/Carlos Garcia
Rawlins

Harvest Natural Resources said in an August filing that
Venezuelan government blocked the deal. Oil Minister Eulogio Del
Pino told Reuters in 2015 the government rejected the sale
because the buyers did not have sufficient financing capacity.

Harvest declined to comment, but the company said in its filing
that the deal's failure made clear that the government would not
approve acquisitions by buyers based outside Venezuela.

The company in October ended up successfully selling its
operations to Delta Petroleum, which is owned by Venezuelan
businessman Oswaldo Cisneros.

Cisneros did not respond to requests for comment.

Principally known as a telecom magnate, Cisneros is making his
first forays in to the oil business this year - and got a
considerably better deal that what Petroandina negotiated,
according to Harvest filings. Cisneros acquired the assets
for$143.2 million, including legal fees and settling of Harvest
debts, or about a third of what Argentina's Pluspetrol had agreed
to pay.